$27 Billion Investment Promises Energy-Efficient, Affordable Housing

The three Greenhouse Gas Reduction Fund (GGRF) programs authorized by the Inflation Reduction Act (IRA) collectively present a once-in-a-generation opportunity to invest in clean technology projects, net-zero buildings, and zero-emissions transportation projects throughout the U.S. The $27 billion in funding allows for a wide range of financing products, and it prioritizes affordable housing—with more than two-thirds of the total funds dedicated to low-income and disadvantaged communities (LIDAC).

Funds are starting to be released to award recipients, who are already in the product development stage and having conversations with industry practitioners. Because the months ahead represent a critical phase for transforming the nation’s affordable housing, this is an ideal time for those who build and finance affordable housing to get involved.

State and local housing finance agencies, housing developers, commercial lenders, and community development financial institutions (CDFIs) will need seasoned guidance and assistance with understanding how to:

• Assess program requirements and eligible uses
• Maximize impact for financing current and future affordable housing deals
• Collaborate with energy and housing sector leaders and ensure that all relevant parties are at the table
• Explore tactical modeling for integrating funds within typical and atypical capital stacks

 Background

The IRA authorized $27 billion to launch three new programs: National Clean Investment Fund (NCIF), Clean Communities Investment Accelerator (CCIA), and Solar for All (SFA). Together, these programs will provide transformational nationwide financing products and a significant opportunity for investing in energy efficiency upgrades to affordable housing. As program administrator, the U.S. Environmental Protection Agency (EPA) has awarded the funds through a competitive process to 68 entities, including state energy agencies, housing finance agencies, green banks, CDFI coalitions, and other housing and energy lenders.

Priority Project Categories

For NCIF and CCIA program financing, priority project categories include distributed energy generation and storage, zero-emission transportation, and net-zero emission buildings¹. According to the EPA, this last category is specifically designed to “make an outsized impact on delivering affordable and sustainable housing benefits to low-income and disadvantaged communities.”

Elevating Vulnerable Communities

As shown in the table, all or a percentage of each GGRF program must benefit LIDAC, defined by the EPA as:

• Communities identified as disadvantaged by the Climate and Economic Justice Screening Tool²
• A limited number of additional communities identified as disadvantaged by the Environmental Justice Screening and Mapping Tool³
• Geographically dispersed low-income households
• Properties providing affordable housing

To qualify as LIDAC, properties providing affordable housing must meet specific definitions within two categories:

Unsubsidized housing. Naturally occurring affordable housing with rents that don’t exceed a range of 30% to 80% of the area median income for at least half of its residential units qualifies as LIDAC under the affordable housing definition.

Subsidized housing. Multi-family housing programs can qualify as LIDAC under the affordable housing definition as long as they offer rents that don’t exceed a range of 30% to 80% of the area median income for at least half of the residential units, AND they have an active affordability covenant under at least one of the following programs:

• Low-Income Housing Tax Credit (LIHTC)
• Housing assistance programs administered by the U.S. Department of Housing and Urban Development (HUD), including Public Housing, Section 8 Project-Based Rental Assistance, Section 202 Supportive Housing for the Elderly, Section 811 Supportive Housing for Persons with Disabilities, Housing Trust Fund, HOME Investment Partnerships Program, Affordable Rental and Homeowner Units, Permanent Supportive Housing, and other programs focused on the goal of ending homelessness funded under HUD’s Continuum of Care Program
• A housing assistance program administered by the U.S. Department of Agriculture under Title V, Sections 514 and 515 of the Housing Act of 1949
• A housing assistance program administered by a tribally designated housing entity as defined in Section 4(22) of the Native American Housing
• Assistance and Self-Determination Act of 1996
• Any other housing assistance program designated by the EPA Administrator

Exploring additional capital sources

This broad range of qualification criteria presents attractive opportunities for developers and investors to explore how GGRF products can align with other project financing to enhance project energy efficiency and fill capital gaps. In addition to the projects that qualify under the GGRF guidance, other capital sources made available or enhanced through the IRA could be combined with GGRF financing, including:

45L Tax Credits for Zero Energy Ready Homes — This federal tax credit of up to $5,000 per eligible dwelling unit is available for owner-contractors who have basis during construction. They can receive the tax credit to finance new or substantially reconstructed homes that meet applicable requirements of the ENERGY STAR home program or the U.S. Department of Energy’s Zero Energy Ready Home program. Recent important changes made through the IRA increase the potential size of the credit and make it more attractive to use with LIHTC projects by removing its impact on reducing eligible basis⁴.

Sec. 48 Investment Tax Credit (ITC) — The IRA made significant changes to this tax credit, which can be used to finance 30% of project basis for electric generation and energy storage (e.g., solar, wind, geothermal). Several bonuses are available for projects located in low-income communities and for qualified low-income residential buildings. New provisions that allow for direct pay and transferability of this tax credit make it a dynamic financing option for a broader array of potential projects and project sponsors⁵.

Home Energy Rebates — The IRA authorized the Home Efficiency Rebate Program and Home Electrification and Appliance Rebates Program to provide rebates through the U.S. Department of Energy for energy efficiency upgrades and for electric appliance purchase and installation^6,7. State and territory energy offices receive the funding to design and operate state-level programs. A portion of funds must benefit low-income households, and 10% of rebate funds from each program must go to low-income multifamily buildings.

Key Considerations

Collaboration among developers, housing authorities, industry leaders, trade groups, banks, CDFIs, nonprofits, and other stakeholders is crucial to ensure that chosen financial structures meet project design and compliance requirements. Some critical aspects to consider when evaluating GGRF fund opportunities include:

Eligible energy investments. Affordable housing project sponsors are faced with this pool of new funds specifically available for energy efficiency and energy production. Sponsors and their designers and financial consultants may need to quickly evaluate potential changes to their projects, identify eligible investments under different programs, and get creative to harness the potential of this funding.

Financial product design alignment. Affordable housing projects that may qualify as LIDAC will have different capital needs. Industry experts will need to work closely with selected awardees across the three GGRF programs to align financial product design with the needs of real-life LIDAC projects in different geographic contexts.

Project redesign to access funding opportunities. Project leaders who didn’t initially include enhanced energy efficiency features but are still able to pivot may wish to redesign their projects to capitalize on these funding sources. Their ability to do this will depend on project specifics and where they are in the project development cycle. Timing becomes more complicated for LIHTC projects that must be aligned with gap financing and tax credit award cycles.

Program compliance. The GGRF programs require compliance with federal laws and standards such as the Davis-Bacon Act and Build America Buy America. These requirements will have different implications on project types. If other public financing sources are used, additional compliance requirements may apply.

Monitoring and reporting requirements. Subrecipients and other entities must be equipped to deliver on monitoring and reporting requirements, as some of these programs require specific reporting to the GGRF selected awardees, EPA, and/or other federal agencies.

Impact on basis. Project leaders should consult tax advisors to understand the potential tax impact as well as to ensure that project basis is correctly calculated when combining capital sources.

Income and affordability. GGRF programs may have different income and affordability requirements from other federal affordable housing programs. It will be important to cross-check all requirements and understand any differences for compliance purposes⁸.

Treatment of community solar credits. One of the eligible uses of Solar for All is community solar. HUD has issued guidance on ways tenants can benefit from solar programs in public housing or HUD-assisted housing with utility allowances⁹.

Securing community impact

While GGRF programs provide an extraordinary opportunity to finance energy-efficient projects and enhance affordable housing projects that otherwise couldn’t fund energy upgrades, the work involved is complex. At Guidehouse, we bring added capacity to all steps of the process, from assessment and application to implementation and compliance.

Our team includes seasoned construction professionals and experts in affordable housing finance, energy efficiency and modeling, scope development, grants management, and compliance with the Davis-Bacon Act and other federal requirements. State and local government partners in all 50 states and commercial partners such as energy providers and real estate investment trusts rely on us to help optimize GGRF funds for the greatest possible impact on vulnerable communities. We’ve secured over $9 billion in GGRF funds and have helped a $2 billion GGRF recipient with operational planning, program design, and implementation.